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Income Tax Appellate Tribunal, DELHI BENCH: ‘E’ NEW DELHI
Before: SH. H.S. SIDHU & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 07/02/2014 by the learned Commissioner of Income-tax (Appeals)-XXVI, New Delhi for assessment year 2002-03, raising following grounds of appeal: i. That the learned Commissioner of Income Tax (Appeals)- XXVI is wrong is deterring the total income at Rs. 2,55,22,744/-. ii. That the learned Commissioner of Income Tax is wrong is ignoring all material fact and evidence and evidence produced before him while computing the total income. iii. That the computation of total income is bad in law and is against the actual facts and evidence on record. iv. That the learned Commissioner of Income Tax has erred in, considering the interest received on Fixed Deposit with the bank source whereof was export proceeds realized by the bank separately as income from other sources, which is bad in law and is against facts and circumstances of the case. v. The learned Commissioner of Income Tax has grossly erred in not netting the interest receipt/payment and then assessing the net result. vi. The appellant craves leave to add, alter, amend, amplify or delete any or all of the grounds of appeal before or at the time of hearing.
The facts in brief of the case as has been reproduced by the learned Commissioner of Income-tax (Appeals) in the impugned order are as under: “Briefly, facts of the case emerged from the appeal record; relevant for deciding this appeal are that the appellant firm is engaged in manufacturing and export of bed-spreads. For the relevant AY, the appellant firm filed its Return of income (ROI) showing income of Rs.1,14,34,884/- after claiming deduction under section 80HHC. Originally, the assessment was completed u/s 143(3) vide order dated 14.01.2005 at income of Rs.2,74,65,742/-, which later on was set aside and restored back, vide order dated 22.06.2007, to the AO by the Hon'ble ITAT to examine the issue of deduction u/s 80HHC in view of in view of Taxation Laws (Amendment) Act 2005 with retrospective effect. In pursuance of the Hon'ble ITAT's direction, the impugned order was passed. Since the appellant's turnover exceeded Rs.10.00 crores and it has not fulfilled the twin conditions of section 80HHC; therefore, the 80HHC was restricted to Rs.92,79,363/- as per the law. Further, the interest receipt on FDRs was taxed under the head 'other sources' and consequentially the netting of interest was not allowed. The set aside was completed on income of Rs.2,88,86,917/-. A 3. The learned Commissioner of Income-tax (Appeals) held the interest income received from FDR’s is taxable under the head ‘income from other sources’ and consequently the deduction under section 80HHC of the Act was disallowed. The learned Commissioner of Income-tax (Appeals) also did not allow the interest expenses against the interest income under section 57(iii) of the Income Tax Act, 1961 (in short ’the Act’) holding that there was no direct nexus between earning of interest and interest expense. 4. Aggrieved with the above findings of the learned Commissioner of Income Tax(Appeals), the assessee in appeal before the Tribunal raising the grounds as reproduced above. 5. The Grounds No. 1 to 3 and 6 of the appeal are general in nature, and hence not required to be adjudicated upon by us. 6. In ground No. 4, the assessee has raised the issue that interest received on fixed deposit was part of business income and therefore should have been considered for deduction under section 80HHC of the Act. In ground No. 5 the assessee has raised the issue of netting of interest receipt against the interest expenses. 7. The learned Authorized Representative of the assessee submitted that the assessee is an exporter and had credit limit Vijay bank to whom interest was paid of Rs.54,52,729.99 and interest of Rs.42,18,469.40 was received on term deposits made by way of cutting back 5% on each export bill/proceeds discounted/purchased and the term deposits were under lien to the credit limit sanctioned. She further submitted that the assessee did not make fixed deposit out of surplus funds and the funds were not placed with the bank for earning interest, whereas the cutback was a pre- condition for credit limit and the precursor to the running of export business and, therefore, the receipt of interest was incidental and having direct nexus and inextricably linked with the export business. She further emphasized that it was not a case of simple parking of surplus funds with the bank having no relation with the export business. She further submitted that the Tribunal in the assessee’s own case for assessment year 1998-99 accepted the direct nexus of interest received and paid and allowed netting of interest. In support of the submission, she relied on the following case laws:
1. 1. Delhi Tribunal decision in the case of Laxminarain Khaitan versus ACIT 2. Decision of the Hon’ble Supreme Court in the case of liberty footwear company versus CIT in appeal No. 5223 of 2008 3. Decision of the Hon’ble Supreme Court in the case of ACG associate capsules private limited versus CIT reported in 247 CTR 372 4. Decision of the Hon’ble Delhi High Court in the case of CIT versus Sahi exports house in ITA No. 106/2009.
8. On the other hand, learned Senior Departmental Representative relied on the order of the lower authorities and Commissioner of Income- tax (Appeals) on the issue in dispute might be sustained.
9. We have heard the rival submissions and perused the material on record. The profit of the business on which deduction under section 80HHC of the Act is allowable, is defined in Explanation (baa) below sub-section 4C of section 80HHC of the Act, which we are reproducing as under: (4C) The provisions of this section shall apply to an assessee,— (a) ……………………… (b) ………….. Explanation.—For the purposes of this section,— (a) …………….. (aa) ………………… (b) ………………………. (ba…………………. (baa) "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by— (1) ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India ; (bb) [***] (c) ……………….. (d) ………….. (e) …………………..
10. According to the assessee, the interest on fixed deposit made with the Vijay Bank is in the nature of receipt from business activity as mentioned in Explanation (baa)(1) reproduced above, and in the case of the assessee, the interest paid on credit limit with Vijay Bank was of Rs.54,52,729/- and Rs.42,18,619/-and thus the net interest of Rs. 12,34,111/- was claimed as an expense in the computation of export profit of the business.
11. But according to the Assessing Officer, the interest received on fixed deposit of Rs. 42,18,619/- was not in the nature of business profit and assessable under the head ‘income from other sources’, and thus the consequential deduction claimed by the assessee under section 80HHC of the Act was reduced. 12. Thus, the issue in dispute before us is whether the interest earned by the assessee on fixed deposit with Vijay Bank is part of business profit or to be assessed under the head ‘income from other sources’. The learned Commissioner of Income-tax (Appeals), relying on the findings given by the Hon’ble Supreme Court in the case of Sterling Foods Vs. CIT, 237 ITR 579 and Liberty India Vs. Commissioner of Income Tax [2009] 317 ITR 218, held that there must be a direct nexus between the profit and gains and the industrial undertaking for application of the words “derived from”, whereas in the instant case the nexus was not direct but only incidental. 13. In the case of Laxminarain Khaitan (supra), learned Commissioner of Income Tax (Appeals) observed that purpose of depositing the funds in the bank fixed deposit to obtain the FDR, was in consideration of which the assessee continue to enjoy various bank credit limits in the shape of packing credits and such interest income arose to the assessee from deployment of business funds, which could not be termed as investment simplicitor. The income earned was in the character as a Trader in the course of export business. The assessee being 100% exporter, income from deposits with banks and other parties was appearing in the character of business income. In support of the finding, the learned Commissioner of Income Tax (Appeals) relied on the decision of special bench in the case of Rajeev Enterprises, 78 TTJ 330. The learned Commissioner of Income Tax (Appeals) further observed that netting was to be done in the light of the special bench decision in the case of Lalson Enterprises Vs. Deputy Commissioner of Income Tax, 89 ITD 25 (Del.) (SB). Against the finding of the learned Commissioner of Income Tax (Appeals), the Revenue appealed to the Tribunal. The Tribunal upheld the finding of the learned Commissioner of Income Tax (Appeals) in the case of Laxminarain Khaitan (supra) with following observations:
“18. The case of the assessee was decided by this Tribunal vide order dated 13th July, 2007 where assessee did not represent and this appeal was again fixed in pursuance of the aforementioned order of the Hon'ble jurisdictional High Court. The issue which we have to decide is whether in case where assessee is 100% exporter, the decision of Hon'ble Bombay High Court in the case of CIT vs. Punit Commercial Ltd. (supra) or the decision of Hon'ble High Court of Delhi in the case of CIT vs. Shree Ram Honda Power Equipment Ltd. (supra) is to be applied. There is no dispute so as it relates to the fact that assessee in the present case is 100% exporter. Therefore, we have to proceed on the basis that assessee is a 100% exporter. In the case of CIT vs. Punit Commercial Ltd. (supra) the Hon'ble Bombay High Court has held that in case of 100% exporter, section 80HHC (3) (a) is applicable and the entire profits are entitled to deduction under section 80HHCincluding interest income. It was the contention of the revenue in that case that the interest income could not be treated as profit relating to export and also that any business profits from an activity which was not an export activity was not eligible for deduction under section 80HHC. With regard to these contentions of revenue it was concluded that there was no merit in such contentions of the revenue. It was observed that in the absence of anything contrary, in a case where assessee is 100% exporter, Section 80HHC (3)(a) will be applicable, therefore, the entire business income is deemed to be profit derived from export of goods and the interest incomecould only fall under business income. It was observed that Section 80HHC (3)(a) deals with 100% exporter whereas Section 80HHC (3) (b) deals with composite business. In the case of 80HHC (3)(b) local sales were included. Therefore, under section 80HHC (3)(a) entire profits are entitled to deduction which would include interest income also. The said decision of the Hon'ble Bombay High Court was also considered in the case of CIT vs. Shree Ram Honda Power Equipment Ltd. (supra) and discussion in this regard find place in para 18 of the said decision. Their Lordships have expressed that it was not clear from the narration of facts in the Punit Commercial Ltd.'s case that whether the interest earned was as a result of parking surplus funds in deposits and if it was so earned, then it will be difficult to accept the said view of Hon'ble Bombay High Court in view of decision of Kerala High Court in the case of K. Ravindranathan Nair vs. DCIT 262 ITR 20 (Ker) which was affirmed by Hon'ble Supreme Court so as to hold that such interest income was business income. Thus, their Lordships of Delhi High Court have recorded their dissent from the view taken by Hon'ble Bombay High Court. Both are the decisions of non-jurisdictional High Court.
19. It is observed from the decision of Hon'ble Bombay High Court in the case of Punit Commercial (supra) that the Assessing Officer in that case also treated the interest income not related to export business. Accordingly, while working out the business profits for the purposes of Section 80 HHC, the Assessing Officer reduced interest income from the business profits. Here, in the present case also similar computation has been done by the Assessing Officer by following the decision of Hon'ble Supreme Court in the case of CIT vs. Dr. V.P. Gopinath (supra). So as it relates to the decision of Hon'ble Supreme Court in the case of CIT vs. Dr. V.P. Gopinath (supra), after referring to the said decision in para 10, Hon'ble Delhi High Court in para 11 have observed that the decision referred in para 10 did not consider or discuss any clause similar to clause (baa) of Explanation below Sub-section (4) (c) of 80HHC of the Act and the provisions of 80HHC were to be considered and construed on its own wordings on 'stand alone' basis, therefore, the decisions referred in para 10 (inter alia Dr. Gopinath's case) may not be particularly helpful. It was observed that wording of clause (baa) of the Explanation incorporates the entire procedure for computing business income u/s 28 to 44 of the Act and in that context those decisions are not particularly helpful since they deal with instances of the treatment of income from other sources referable to Section 56 and the allowing of netting for the purpose of earning such income. Thus, their lordships of Hon'ble Delhi High Court having found that the said decision of Hon'ble Supreme Court in the case of CIT vs. Dr. V.P. Gopinath (supra) s not relevant for deciding an issue where the question relating to deduction u/s 80HHC is to be decided.
20. It has been seen that Hon'ble Bombay High Court and Hon'ble Delhi High Court have taken different view on this issue and there is no jurisdictional High Court decision on this issue. Ld. Counsel of the assessee has referred to the decision of Hon'ble Supreme Court in the case of CIT vs. Kullu Valley Transport Company Pvt. Ltd. (supra), CIT vs. Vegetable Products Ltd. (supra) and CIT vs. Naga Hills Tea Co. Ltd. (supra). The sum and ratio of these decisions is that while interpreting taxing statute if there are two reasonable interpretations, then the interpretation which is favourable to the assessee is required to be accepted. So, the law in this regard is well settled, the interpretation which has been put by Hon'ble Bombay High Court in the case of CIT vs. Punit Commercial Ltd. (supra) has to be followed being favourable to the assessee. We decide the issue accordingly.
So far as it relates to netting, it is observed that netting under section 80HHC has even been upheld by Hon'ble Delhi High Court in the case of CIT vs. Shree Ram Honda Power Equipments Ltd. (supra) wherein their Lordships have approved the decision of Special Bench in the case of Lalson Enterprises (supra) for the proposition that netting was permissible. So on that account also we find no infirmity in the order of the Ld. CIT (A) wherein he has directed the Assessing Officer to allow the netting.”
The Hon’ble Apex Court in the case of M/s. A.S.G. Associated Capsules Private Limited Vs. CIT (supra) concluded that “only 90% of receipts by way of brokerage, commission, interest, rent charges or any other receipt of a similar nature included in such profits computed under the head ‘profits and gains of business’ of assessee could be deducted under clause (1) of Explanation (baa) to Section 80HHC and not 90% of the quantum of any of the aforesaid receipts which are allowed as expenses and therefore not included in the profits of business of assessee.” The relevant observation of the of the Hon’ble Apex Court are as under: “12. If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under Section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with Sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head “Profits and Gains of Business or Profession”, ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head “Profits and Gains of Business or Profession”, is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business.
The view that we have taken of Explanation (baa) to Section 80HHC is also the view of the Delhi High Court in Commissioner of Income-Tax v. Shri Ram Honda Power Equip (supra) and the Tribunal in the present case has followed the judgment of the Delhi High Court. On appeal being filed by the Revenue against the order of the Tribunal, the High Court has set aside the order of the Tribunal and directed the Assessing Officer to dispose of the issue in accordance with the judgment of the Bombay High Court in Commissioner of Income-Tax v. Asian Star Co. Ltd. (supra). We must, thus, examine whether reasons given by the High Court in its judgment in Commissioner of Income- Tax v. Asian Star Co. Ltd. (supra) were correct in law.
14. On a perusal of the judgment of the High Court in Commissioner of Income-Tax v. Asian Star Co. Ltd. (supra), we find that the reason which weighed with the High Court for taking a different view, is that rent, commission, interest and brokerage do not possess any nexus with export turnover and, therefore, the inclusion of such items in the profits of the business would result in a distortion of the figure of export profits. The High Court has relied on a decision of this Court in Commissioner of Income-Tax v. K. Ravindranathan Nair [(2007) 295 ITR 228 (SC)] in which the issue raised before this Court was entirely different from the issue raised in this case. In that case, the assessee owned a factory in which he processed cashew nuts grown in his farm and he exported the cashew nuts as an exporter. At the same time, the assessee processed cashew nuts which were supplied to him by exporters on job work basis and he collected processing charges for the same. He, however, did not include such processing charges collected on job work basis in his total turnover for the purpose of computing the deduction under Section 80HHC (3) of the Act and as a result this turnover of collection charges was left out in the computation of profits and gains of business of the assessee and as a result ninety per cent of the profits of the assessee arising out of the receipt of processing charges was not deducted under clauses (1) of the Explanation (baa) to Section 80HHC. This Court held that the processing charges was included in the gross total income from cashew business and hence in terms of Explanation (baa), ninety per cent of the gross total income arising from processing charges had to be deducted under Explanation (baa) to arrive at the profits of the business. In this case, this Court held that the processing charges received by the assessee were part of the business turnover and accordingly the income arising therefrom should have been included in the profits and gains of business of the assessee and ninety per cent of this income also would have to be deducted under Explanation (baa) under Section 80HHC of the Act. In this case, this Court was not deciding the issue whether ninety per cent deduction is to be made from the gross or net income of any of the receipts mentioned in clause (1) of the Explanation (baa).
The Bombay High Court has also relied on the Memorandum explaining the clauses of the Finance Bill, 1991 contained in the circular dated 19.12.1991 of the Central Board of Direct Taxes to come to the conclusion that the Parliament intended to exclude items which were unrelated to the export turnover from the computation of deduction and while excluding such items which are unrelated to export for the purpose of Section 80HHC, Parliament has taken due note of the fact that the exporter assessee would have incurred such expenditure in earning the profits and to avoid a distorted figure of export profits, ninety per cent of the receipts like brokerage, commission, interest, rent, charges are sought to be excluded from the profits of the business. In our considered opinion, it was not necessary to refer to the explanatory Memorandum when the language of Explanation (baa) to Section 80HHC was clear that only ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits computed under the head profits and gains of business of an assessee could be deducted under clause (1) of Explanation (baa) and not ninety per cent of the quantum of any of the aforesaid receipts which are allowed as expenses and therefore not included in the profits of business of the assessee.
In the result, we allow the appeal and set aside the impugned order of the High Court and remand the matter to the Assessing Officer to work out the deductions from rent and interest in accordance with this judgment. No costs.”
15. In the case of Liberty Footwear Company Vs. CIT (supra) the Hon’ble Apex Court followed the decision in the case of A.C.G. Associated Capsules Private Limited (supra).
16. In the case of Commissioner of Income Tax Vs. Sahi Export House, the question before the Hon’ble Delhi High Court was as under: “Whether ITAT was correct in law in allowing benefit of netting of interest to the assessee while computing deduction under section 80HHC of the Act ? ” 17. The question is answered in favour of the assessee with following observations:
8. Thus, insofar as earning of interest on fixed deposit is concerned, the determinative test is as to whether such interest has immediate nexus" with the export business.
In the present case, the interest is earned from certain fixed deposit receipts. These fixed deposit receipts were not, as a result of some surplus funds available to the assessee which was parked with the bank and the interest earned thereon. It has been found, as a fact, that the money was deposited in the bank and the fixed deposit receipt was taken by the assessee for the purposes of giving bank guarantees to enable the assessee to procure quota for export. Certain other fixed deposit receipts were of EEFC Account. Such receipts were deposited with the Apparel Export Promotion Council (AEPC) against guarantees being legal pre- condition for procurement of quota in the absence of which no business is done. It clearly implies that without such quota, which was ultimately procured by the assessee, no export of garment could be made. This quota is obtained from AEPC and AEPC sanctions the quota only when fixed deposit receipts are pledged with it in the form of a bank guarantee. It is because of the reason that the exporter is required to meet various conditions prescribed for allowing the quota. One of the conditions is to make actual exports to the extent of quota. If the exports are deficient then penalties can be imposed and to safeguard that, guarantees are obtained. Likewise, fixed deposit receipts on EEFC account also relate to the export.
It would, thus, be clear that furnishing of these fixed deposit receipts is an obligation, and is a pre-condition for obtaining export quota in the absence of which exports cannot be made. In such a scenario, the furnishing of these bank guarantees is a direct nexus with the export activities of the assessee and interest earned thereupon would clearly be treated as having an immediate nexus with the export business.
We are, therefore, of the opinion that CIT appeal as well as Income Tax Appellate Tribunal has rightly applied the principle laid down in Shri Ram Honda Power Equip (Supra). It may be useful to mention that in Shri Ram Honda Power Equip (Supra) this court specifically affirmed the judgment of Special Bench of the Tribunal in Lal Sons Enterprises v. Commissioner of Income Tax; 2004 (89) ITD 25 (Delhi) and particularly the following observations which were extracted by this court as under:- "if the interest received is found to have a nexus with the business, still it remains to be excluded from the Explanation (baa)(1), but the claim is that the quantum of such interest income to be excluded must be determined in accordance with the computation provisions relating to business by allowing expenditure by way of interest which bears a nexus with the interest receipt. The computation provisions included section 37(1) under which any expenditure incurred or laid wholly and exclusively for the purpose of the business is to be allowed as a deduction. Therefore, any expenditure incurred which has a connection or nexus with interest receipt has to be allowed as a deduction and only the balance can be excluded from the business profits."
Once this positions is accepted, as per the formulation of principle laid down in Shri Ram Honda Power Equip (supra) itself, netting has to be allowed by the adjustment of aforesaid interest received against the interest paid by the assessee to the bank on the credit facilities availed as is clear from the conclusion No.8 in the judgment.”
Further, we find that that the Tribunal in the case of the assessee in for assessment year 1998-99 has decided identical issue in favour of the assessee. The relevant paragraph of the decision is reproduced as under: “3. During the course of hearing before me the ld. Authorized Representative of the assessee referred to page no. 8 of the paper book being certificate issued by Chief Manager of Vijaya Bank on 10.01.2002. According to the assessee this certificate had been furnished before the learned Commissioner of Income Tax (Appeals). As per the certificate while discounting the assessee’s export bills a certain percentage was cut back and treated as deposit from the assessee by way of security. It is, therefore, apparent that corresponding interest paid by the assessee to the bank has a direct nexus with the interest received by the assessee on the deposits with M/s. Vijaya Bank. The Assessing Officer is, therefore, directed to reduce only 90% 80HHC.”
Respectfully following the above cited decisions of the Tribunal , the Hon’ble Delhi High Court and the Hon’ble Apex Court, when we apply the ratio over the facts of the instant case, we find that the fixed deposits have been made as a precondition for credit limit and which was required for earning in the business of export and, therefore, receipts of interest has direct nexus with the export business of the assessee and inextricably linked with the export business and it was not a case of parking of funds simpliciter, thus, we hold that the interest income earned from the fixed deposit was a part of business profit and netting of interest expenses against the interest income earned from the FDR is accordingly allowed while computing deduction under section 80HHC of the Act. Thus, both the grounds No. 4 and 5 of the appeal are allowed.
In the result, appeal of the assessee is allowed. The decision is pronounced in the open court on 5th September, 2016.